No wonder saving for retirement has hit an all time low - down from 51% to 46% over the past year alone

What incentives are being given to save into a pension, other than the 'tax breaks' which are arguably worthless for anyone on basic rate tax. The tax benefit is more than outweighed by the restrictions on access to the funds, withdrawing money and the inevitable interference by sucessive Governments (witness GB raid on tax credits) who see savings in whatever form as a 'cash cow' to be milked for their benefit

The present scandal revolves around 'drawdown income' in retirement and the existing Government's contribution to the mess

Successive Governments are obsessed with two over-riding ideas

  • Firstly - underlying pension funds are going to be used as a vehicle by a few to avoid death duties & IHT - so the majority are penalised by the very same ministers whos families have off-shore interests
  • Secondly - if you are allowed access to your pension fund then you will spend it recklessly and fall back on the state when the money has all gone

In order to ensure that you are prudent with taking income from your own pension fund the Government has implemented a number of artificial measures to restrict pension income:

  • Artificially low interest rates - which in turn affects medium-term Gilt yields; currently 'floored' around 2.25%-2.50%
  • Annuity and pension drawdown rates (GAD) are largely based on medium-term Gilt yields and have been forced down by engineered interest rates to the lowest they have ever been
  • Just to add insult to injury the GAD maximum annual income limit has been reduced from 120% to 100%

The net affect of all the above is that pension income has been severely reduced and those who anticipated having a realistic lifestyle in retirement have had rather a shock

However, if the pension fund investment return if greater that the permitted drawdown income then inevitably the value of the fund grows; which on death means a greater 'tax take' for the Government with a tax rate of 55% despite the fact that the pensioner has been forced to have a reduced income during their lifetime

The question has to be:

Why should anyone bother to save for their retirement into a pension fund when clearly they are not going to benefit in line with their expectations? These funds are built up over a lifetime and yet Governments can change matters at the drop of hat with no accountability

Now to put this in context:

If you owe a lot of money then interest rates are the key and the classic way of wiping out some of the debt is to increase inflation whilst at the same time lowering interest rates

This means that anyone with debt (i.e. mortgages etc.) potentially becomes better off, although savers are penalised and are worse off, being hit with a 'double whammy' - loss of 4% interest on savings and reduction in their capital of 3%-4% via inflation; making them 6%-8% worse off

So once again the prudent are penalised in favour of the feckless, which seems to be the way of things in the UK at the present time

GAD = Government Actuarial Department

Tags: | Categories: UK Government

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